* Loan growth, defaults show signs of improving
* Lending growth seen at 16 percent for this year
* Decline in borrowing costs to lose momentum
By Guillermo Parra-Bernal and Tiago Pariz
SAO PAULO/BRASILIA, Dec 19 (Reuters) - Lending growth and defaults at Brazilian banks showed signs of recovery in November, the central bank said on Wednesday, in a further indication that an ongoing decline in borrowing costs is easing the finances of companies and consumers.
Loans in arrears for more than 90 days, a benchmark for defaults in Latin America's largest economy, fell in November for the first time in five months, although remained near a record. Banks increased the stock of credit by 1.5 percent in November as private sector lenders sought to recoup some of the ground lost in prior months.
The average cost of borrowing in the banking system fell for a ninth month in a row in November, hitting 28.9 percent. The spread, or the difference between the rate at which banks lend money and that at which it pays for deposits, fell to an all-time-low of 21.6 percentage points.
The results underscore the impact of government efforts to bring down benchmark interest rates in Brazil to single-digits, a goal that President Dilma Rousseff set out for a country where, only a year ago, borrowers paid the world's highest interest rates. Still, the cost of credit remains prohibitive for millions of Brazilians while access to the market is still restrictive.
"Credit conditions are easing at a gradual pace: credit is increasing at a moderate pace and lending rates continue to decline," said Alberto Ramos, chief Latin America economist with Goldman Sachs Group Inc in New York.
Loans made by commercial banks in Brazil totaled 2.304 trillion reais ($979 billion) last month, the central bank said. Twelve-month trailing growth in bank lending slowed to 16.1 percent in November from 19 percent at the start of the year.
The average default ratio for the banking system fell to 5.8 percent in November compared with 5.9 percent the prior month. Corporate loans in arrears for 90 days or more remained unchanged at 4.1 percent of the segment's stock of credit, while those for consumer credit fell to the equivalent of 7.8 percent.
Tulio Maciel, the central bank's head of economic research, said potential reductions in borrowing costs are likely to lose momentum into 2013. He unveiled a 14 percent estimate for lending growth in 2013, down from his 16 percent projection for this year.
According tot Maciel, a higher base of comparison may offset the impact of a recovery in demand for credit. Estimates from private economists put economic growth in 2013 at below-trend rates for a third year in a row - with estimates for the 2013 expansion already facing steep cuts.
In addition, he said that "the reductions in borrowing costs that we witnessed over the past few months we won't see next year."
He added that defaults, especially those between 15 days and 90 days, will keep falling well into 2013 as borrowers take advantage of the lower tax and debt burdens and stable wages to get current on their obligations.
STATE BANKS LEAD GAINS
State-controlled banks stepped up disbursements to help the government kick-start activity in Latin America's largest economy.
Public banks, including development bank BNDES and Banco do Brasil SA, ramped up their loan book by 2.2 percent in November to a record 1.08 trillion reais. Local private-sector and foreign banks upped lending by 0.9 percent and 1.1 percent each, respectively.
Maciel raised his forecast for growth in the loan book of government banks to 26 percent from a previous 24 percent estimate. Forecasts for growth in the loan book of local private-sector banks were slashed to 7 percent from a prior 10 percent.
The new-found caution among private banks is pitting them against the government, which has used state lenders Banco do Brasil and Caixa Econômica Federal to bring down the cost of credit to businesses and consumers and boost access to credit.
The new forecasts signal growing caution among policymakers as Brazil struggles to emerge from a downturn. Local private-sector banks have drastically restricted loan origination since the start of the year as deleveraging in risky segments such as auto financing took longer than expected.
One in every six households are considered as overleveraged, according to a recent report by Santander Investment Securities analysts.